How Housing is Squeezing Out Other Spending

Posted by: Michael Mandel on May 26

I’ve got a new story here about how the housing boom is hurting the rest of the economy.

Unfortunately, I didn’t have room for this wonderful chart, which shows how housing and medical care are squeezing out other types of consumption spending.

housetechrevised_14775_image001.gif

This chart shows that outside of housing and medical care, personal consumption has actually plunged to its lowest level ever, as a share of domestic demand.

(In this chart, domestic demand is GDP minus the trade deficit, and the 2005 data is for the first quarter, of course.)

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Reader Comments

Larry Dickson

May 26, 2005 04:30 PM

This chart, and your article (posted on Yahoo) decrying the pinch on "growth", neglects reality. Housing is "money spent for my needs" while what you call growth is "money spent to make money" - circular. The low mortgage rates indicate more investors are giving up on the circle. If growth, like Moore's Law, is dying, it will be a real revolution for our children.

Jack Krupansky

May 26, 2005 04:31 PM

Okay, I read your article carefully, *twice*, but I still don't feel that you have a strong case for the thesis of the subtitle: "Resources going into housing could fuel sectors that better drive growth." Okay, superficially, hypothetically, those resources "could" fuel other sectors, but you haven't made the case that on a risk-adjusted basis there is a demand for those resources that investors in other sectors would find attractive.

Case in point: we current have a *glut* of venture capital. Sure, some ventures are not being funded, but mostly because all of that capital simply doesn't find the risk-adjusted opportunities appealing. Throwing more capital at the VC sector will help not one iota.

The telcoms may need to upgrade infrastructure, but adjusted for risk, what demand for vast amounts of capital is there? Verizon is in a so-so financial position; loading them down with debt or diluting shareholder interest is *not* an appeal use of "capital." Qwest? I don't think so.

The car companies? Does GM or Ford (or their shareholders, lest we forget them) need *more* debt and at a higher interest rate?

Does the federal government need to borrow more money? Do state and local governments need to increase their debt burdens?

Aren't a lot of businesses funding new projects by cutting costs elsewhere (e.g., outsourcing or offshoring)? Will taking on debt or diluting shareholder interest really be a good idea, including for shareholders?

Does Microsoft, Intel, or Cisco not already have enough capital to toss around?

Is it in *anybody's* interest for Oracle to take on massive amounts of debt for acquisitions (ala WorldCom)?

I'm confident that we have not a clue about how the housing market will evolve over the coming years -- after all, doesn't it depend on demand as well as the cost of credit? -- or where capital will go as the demand for capital by the housing market *may* decline, but I haven't yet heard the case for what *reasonable* spending is waiting in the wings due to the housing boom.

Personally, I'm pinning my hopes on innovative new startup ventures, but I'm afraid that patience is the primary ingredient needed, not an even greater excess of capital.

My invitation to you: Try again!

-- Jack Krupansky

Diane Anderson

May 27, 2005 03:22 PM

Where can I get more detail on your annual statistics for residential construction as a percentage of GDP?

Also, is there any way to measure the other impacts of housing on GDP? For example, how are real estate brokers and mortgage brokers reflected in the GDP statistics?

I share your concern about McMansions. To me, housing is consumption -- once the house is built, it is not a source of jobs or economic growth, unlike an investment in a factory.

Also, a house is not a "store of value," especially if people all try to sell at the same time.

Michael Mandel

June 5, 2005 10:09 PM

Diane--the stats for residential construction come from the Bureau of Economic Analysis. What kind of detail are you looking for?

Jack--The nature of a bubble is that it sucks resources from the rest of the economy. The part where spending seems unreasonably low to me, given the innovativeness, is the tech/information sector. But, as they say, time will tell.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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